Hang Seng and Shanghai Composite Index Technical Outlook: At Crossroads

Hang Seng Index, Shanghai Composite Index, China/Hong Kong Equities – Technical Outlook:

• Is it make or break for the Hang Seng Index?
• Shanghai Composite Index risks further weakness.
• Are there any signs of a turnaround and what are the key levels to watch?

HANG SENG INDEX TECHNICAL FORECAST – BEARISH

The Hang Seng Index looks deeply oversold as it approaches key technical support, pointing to some consolidation and or rebound. However, there is plenty of resistance to cap any rebound, keeping the overall medium-term downward bias intact.

After closing at a new 6.5-year low last week on the chart below, Hong Kong’s benchmark index is testing crucial long-term support on a horizontal trendline from 2016 at 18,235. This level is strong, and a break below is by no means imminent. Indeed, with the Relative Strength Index (RSI) below 35 across intraday and higher timeframes, the index could rebound a bit in the short term.

However, any rebound is unlikely to be substantial given a series of resistance starting with last week’s high of 19,492, followed by the end-August high of 20,185. For the medium-term downward pressure to ease, the index would need to break above the June high of 22.449, slightly above the 200-day moving average.

Until then, the big-picture downtrend remains intact – the Moving Average Convergence Divergence indicator (MACD), a measure of trend and strength of a trend, remains negative across multiple timeframes. A decisive break below 18,235 could initially pave the way towards an internal downtrend line within a declining channel from 2015 (now at about 17,820), potentially towards the 2011 low of 16,170 (see chart).

HANG SENG INDEX Monthly Chart

Chart Created Using TradingView

SHANGHAI COMPOSITE INDEX TECHNICAL FORECAST – BEARISH

The break this week below important technical support indicates that the Shanghai Composite Index could fall further in the coming days or weeks. The fall below a slightly upward sloping trendline from August has triggered a bearish breakout from a triangle, pointing to a fall towards 3,040, the price objective of the pattern.

Triangles are continuation patterns, and a breakout from the pattern typically signifies a resumption of the prior trend in force. For China’s onshore benchmark index, the trend has been down since June, when it failed to break past tough resistance on the 200-day moving average, coinciding with the upper edge of the rising channel from March.

There is fairly strong support on the lower edge of the channel (now at about 3,100). Previous tests of internal trendlines within the channel have led to either brief pauses or even trend reversals. So, a minor rebound this time around wouldn’t be surprising. Still, any potential rebound could encounter hurdles, starting with the early-September low of 3,174 followed by the mid-September high of 3,278.

SHANGHAI COMPOSITE INDEX Daily Chart

Chart Created Using TradingView

— Written by Manish Jaradi, Strategist for DailyFX.com

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